Earlier this month, Brad Smith, the president of Microsoft, met with Lina Khan, the chair of the Federal Trade Commission, to push for regulatory approval of Microsoft’s $69 billion acquisition of the video game company Activision Blizzard.
Mr. Smith’s gamble — which included offering to keep Activision’s blockbuster game Call of Duty generally available to address competition concerns — has failed. A day after their meeting, Ms Khan’s agency filed a lawsuit to prevent the blockbuster deal.
But in an interview this week, Mr. Smith was optimistic. “She didn’t take me up on my offer, but when I said give peace a chance, she at least smiled a little,” he said of Ms Khan. “So any time someone can end a meeting with even a little smile, there’s always a little bit of hope that we can sit together in the future.”
Mr. Smith’s peacemaking remarks reflect how Microsoft intends to approach the next phase of the deal with Activision. Rather than abandoning the acquisition, he said, the company plans to gamble that its “nice guy” strategy could still work.
With one plan, Microsoft hopes to win over regulators in Europe, people familiar with the approach said. European approval of the Activision deal could force US officials to reach a settlement that will allow the acquisition to go ahead or a faster, more favorable court to hear the case, the people said.
Microsoft expects to file its response to the FTC lawsuit Thursday, company officials said. In its response, the company plans to argue that the deal would give gamers more options at lower prices, they said.
The FTC has said the deal should be stopped because it would harm consumers. It said Microsoft, which makes the Xbox console, could use Call of Duty and other popular Activision titles to lure gamers from rivals, particularly Sony, which makes the PlayStation console.
Microsoft’s seemingly conciliatory approach is part of an almost complete cultural transformation by the company since the 1990s, when it was known as the “Evil Empire” for its powerful tactics to shut out competitors. But under Satya Nadella, who became CEO in 2014, and Mr. Smith, who is also Microsoft’s top attorney, has leaned the company over in recent years to show it has matured.
Going through the Activision deal has implications for more than just Microsoft. The FTC lawsuit is a landmark in a new era of government scrutiny of the biggest tech companies. Ms. Khan has put an aggressive trust agenda in the case, which legal experts say could be hard to win. If Microsoft doesn’t get the deal approved, other tech giants will be less likely to force a mega deal.
“They will fight it,” said Sid Parakh, a portfolio manager at Becker Capital, which invests in Microsoft. “It goes a little bit further than this deal. It is also a statement to the FTC.”
Within the video game industry
With Microsoft having more than $100 billion to spend, he added, “they don’t want to back down now and then and then every acquisition gets shot.”
The acquisition of Activision must be completed by mid-July, otherwise Microsoft will have to pay a whopping $ 3 billion in termination compensation. Many hurdles remain, including approval from other global regulators, particularly in Britain and in the European Union. If Microsoft can reach a formal settlement with them, it would leave the FTC at a critical time.
The FTC sued Microsoft in administrative court, which has no power to prevent the deal from closing while the case is pending. If other regulators approve the deal, the FTC would have to decide whether to file an injunction against the acquisition in federal court to stop it. The court order could move quickly, potentially allowing Microsoft a quick legal victory.
“There is no reasonable, legitimate reason why our transaction cannot be completed,” Activision CEO Bobby Kotick said in a statement Wednesday. “We believe we will prevail on the merits.”
The FTC declined to comment on Microsoft’s strategy or Mr. Smith’s conversation with Ms. Khan. Holly Vedova, the director of the FTC’s Bureau of Competition, said the bureau is always willing to consider proposals from companies seeking to resolve antitrust issues.
Microsoft is trying to strike a balance between being open to a settlement on the one hand and preparing to quash the FTC’s case in court on the other. It hired Beth Wilkinson, who prosecuted the Oklahoma City attack case in 1995 before becoming one of America’s leading trial attorneys, to plead on behalf of the company in the FTC’s internal court.
Mr. Smith said he was optimistic the case could avoid a messy process, in part because of Microsoft’s past experience with antitrust enforcement.
In the 1990s, the company was known for its scorched-earth business tactics, bundling software products to get ahead of the competition. In 1992, when regulators investigated the company, Microsoft co-founder Bill Gates dismissed the investigation, saying, “The worst thing that could come out of this is that I could fall on the steps of the FTC, hit my head, and can commit suicide.”
Two years later, Microsoft agreed to a federal consent degree that gave PC manufacturers more freedom to install programs from other companies. It avoided being broken up after an antitrust lawsuit in 1998 and finally settled with the George W. Bush administration in 2001.
“The trial forced Microsoft to mature, especially in its relationships with regulators and institutions outside the tech industry,” said Margaret O’Mara, a professor at the University of Washington who researches the history of technology companies.
In 2001, Mr. Smith entered interviews to be Microsoft’s top lawyer with a message: It was time to make peace with regulators and competitors. He got the job. Over the next few years, he reached legal settlements on competition issues with governments around the world and other industry players.
It didn’t always go smoothly. Negotiations between the company and Sun Microsystems, a server company that created the popular Java programming language, fell through and took a year to get back on track. In 2004, Steve Balmer, then CEO of Microsoft, was on a plane to Brussels to announce a deal with the European Commission when Mr Smith got news that the commission would instead sue Microsoft for pre-installing applications in its Windows software. operating system. It took five years to close a deal.
Since Mr. Nadella took over, Microsoft has taken an even more open stance. His first acquisition was the studio that makes Minecraft, a game in which children learn and socialize in a vast virtual world. He also spent $7.5 billion to buy GitHub, a software platform that supports open-source code.
Microsoft is now the world’s second most valuable publicly traded company, largely driven by its strong cloud computing offering. The business activities central to their growth generally attract less government attention than social media or other consumer-oriented ventures.
Worldwide, Mr. Smith presented Microsoft as a gentle giant willing to cooperate with skeptical legislators. He has proposed middle lines on controversial issues such as app stores and supported bipartisan interests such as broadband expansion.
Mr. Smith maintains strong relations in Washington. As a bundler for President Biden’s campaign, he attended a White House state dinner for French President Emmanuel Macron just days before the FTC filed a lawsuit to block the Activision deal.
After the deal was announced in January, Microsoft did everything it could to allay regulators’ fears. Mr. Smith and Mr. Nadella traveled to Washington in February to promote the benefits of the deal. The company also made peace with a troubled union, which in turn lobbied the FTC for the deal. And it promised Sony it would keep Call of Duty on PlayStation for years to come, signing a deal to put the game on Nintendo’s Switch.
Mr Smith said “things moved quickly” in the final weeks before Microsoft was sued. When FTC employees met with Microsoft’s team, it became clear the agency had serious concerns, he said.
“Our team asked, ‘Can we discuss a settlement proposal? “And the staff said, ‘Not with us,'” he said. Subsequent discussions with the agency’s antitrust bureau leadership came to nothing, he added.
On December 6, Microsoft drafted a formal settlement proposal for the agency. Mr Smith declined to say exactly what it contained, but said it addressed “all issues related to Call of Duty”, referring to fears Microsoft could take the title from rival consoles. Mr. Smith spoke virtually for an hour the next day with each of the bureau’s four commissioners.
A day later, the FTC commissioners voted 3 to 1 to take the case.
But Mr. Smith said he refused to see the situation as an us-versus-them situation.
“I will always start by asking myself, Could I have done more?” he said. “What I do know is that January brings a new year.”
Kelly Browning reporting contributed.
